September 25, 2009

G20 Starts Phasing Out Fossil-Fuel Subsidies--Sort Of

Looks like this week's climate banter wasn't totally substance-free. Earlier today, G20 governments finally agreed to phase out subsidies for fossil fuels, which jack up demand for oil, gas, and coal by artificially lowering prices. The phase-out would happen in the "medium term," with no specific timetables (countries like India want a slow transition so poor people don't get hit with a swift price spike).

Still, it's a decent first step. Based on data from the International Energy Agency, scrapping the subsidies—which in developing countries totaled $310 billion in 2007—could help slash CO2 emissions as much as 10 percent by 2050. Plus, Keith Johnson suggests another possible benefit:

There’s one other potential impact from getting rid of such subsidies: It could actually make oil a friendlier, less volatile source of energy. That is, consumption subsidies distort demand; in the Middle East and Asia, demand for oil kept rising even when crude hit $140, because many consumers didn’t pay market prices. Gas in Saudi Arabia, for instance, sold for about 50 cents a gallon when oil was priciest. That demand spike helped cause the price spike.

Removing those subsidies could ease demand precisely where it is growing fastest—Asia and the Middle East. That could also free up more oil for export, as domestic demand falls back down in big oil-producing countries. The net effect of both would be to smooth out the violent price swings that have characterized the oil markets in recent years—and which helped galvanize public attention and appetite for alternative energy.

Those big swings in oil prices aren't necessarily good for clean-energy development, anyway. The pattern we've seen at least so far is that crude gets expensive, everyone gets excited about developing alternatives and weaning ourselves off oil, but then prices get so high that there's a recession and suddenly no one's in the mood to make major changes anymore. Lather, rinse, repeat, etc. Less volatility would probably lead to a greener world, all things considered.

Oh, and what about subsidies in the United States? The Obama administration's taking aim at some $31.5 billion in tax breaks for oil and gas producers in its next proposed budget—incentives that, as I noted the other day, still outweigh what renewable industries get. Still, this is relative peanuts in the global scheme of things: Alan Krueger testified before the Senate last week to reassure everyone that removing these tax breaks would only decrease domestic oil and gas production by about 0.5 percent, even in the long run. But that also means ending U.S. subsidies, by itself, won't have much of an environmental impact, either. The big gains will depend on what other countries do.